Jersey no longer a safe haven for dormant shell companies

Mumbai: For many rich Indians, 2019 has begun on an awkward note. Jersey, one of their favourite tax havens, is questioning the lack of ‘substance’ in the nameplate firms set up to either hold undisclosed money, or invest in other countries.

In the last few days, service providers in Jersey have reached out to these companies and their advisers, telling them that these firms must have some activity and business — or substance, in tax parlance.

“This is based on directions that service providers have received from Jersey authorities. But none of these companies are operational. In order to establish substance, these outfits would have to be used for future transactions. But, this won’t be easy given the disclosure and surveillance standards,” a person aware of the development told ET.

In most cases, investments to purchase shares of such companies were carried out outside the Reserve Bank of India’s liberalised remittance scheme (LRS) — the official window that permits a resident Indian to invest as much as $250,000 a year in stocks and properties abroad. Thus, the very investment in these companies is irregular and amounts to a violation under harsh Indian laws like the Foreign Exchange Management Act and Prevention of Money Laundering Act (PMLA).

Such front entities are floated by service providers in Jersey who do the paperwork to register the firm and hire locals willing to lend their names as directors. In many cases, these companies are beneficiaries of discretionary trusts set up to ring-fence wealth from tax authorities and bankruptcy proceedings.

Till now, Indians with undisclosed offshore assets have faced the wrath of the Income Tax Department and Enforcement Directorate which had slapped notices on individuals whose names surfaced either following leaks like Panama Papers or in the course of bank account details revealed by various tax havens as part of their respective informationsharing pacts with India.

For the first time, a tax haven such as Jersey is raising the criteria relating to ‘substance’ for entities that for years have been dormant shell companies.